How I Value Growth Stocks
- The first thing I look for is fast growth, the faster the better. Companies like Microsoft, Wal-Mart and Google have shown investors just how rapidly small companies can become gigantic in the modern era. Fuelled by the growth of emerging markets and the way technology is breaking down global barriers these opportunities are bigger and better than ever. Companies can grow incredibly fast for an incredibly long time delivering phenomenal returns for investors.
- The second thing I look for is quality. This is nebulous but also usually obvious. The best investments are companies that are innovative and best in the world at what they do. I love companies that are market leaders or lowest cost operators. I also like great managers and this too is usually obvious when you look at what they are doing. High quality businesses thrive whatever happens by adapting to circumstances and continually raising the bar in what they do. I frequently recommend shares in small companies but for me small is below £1bn market capitalisation.
- Great companies generate cash. Apple is a great company and this is reflected in the balance sheet, which shows cash reserves of around $100bn! Microsoft is also a fabulously cash generative business and there are many others. The main exception I make to this rule is for early stage technology companies, but even then the best time to buy is usually when they start to generate cash. I leave venture capital to venture capitalists. Cash is the one sign of success that cannot be fudged.
- I don’t worry too much about PE ratios.I like good value as much as the next man but with fast growing companies you have to take a view on the future and that will be reflected in the present valuation. Great growth stocks typically look very expensive on a one-year view and unbelievably cheap on a 10-year view but you have to be a believer. I see my job as finding shares in which I can believe.
- As important as all the above is that the company should be benefiting from a massive global trend. Young men are becoming almost as fashion conscious as young women. This looks like a huge global trend that is going to enable sustained strong growth for companies that can satisfy these aspirations. There are loads of big trends like this in the world today. We live in exciting times.
Read on to find out why I think the bull market is back .